Cash flow is the money entering and moving out of a business. You manage cash flow of your organisation if you optimally regulate the money coming in (inflow) and going out (outflow).
Managing cash flow: Why is it necessary?
Every business or enterprise, big or small, must maintain a healthy cash flow to meet its financial commitments. The biggest challenge for most business owners is figuring out when and how to have cash in hand and regulate judicious spending without running into cash problems.
Maintaining healthy cash flow allows a business to meet its financial obligations and also provides growth flexibility. Especially for a small or midsize business, effective cash flow management is of utmost importance.
Particularly when uncertainty hits, small & medium businesses (SMBs) are predominantly affected, unlike established enterprises, which often have sufficient cash reserves to stay afloat during bad times. It was evident during the Covid-19 pandemic when small businesses mostly took the hit due to their lack of resources and backup plans to ride out during challenging times.
So prioritising strategies in business cash flow planning and keeping a close eye on cash flow is a must for every SMB. Additionally, a business with a strong cash flow can benefit from loans with lower interest rates and better investments.
5 Ways to manage cash flow for your business
Learning to manage cash flow is an elementary building block for your business finances. Many profitable companies turned bankrupt due to a lack of a proper cash flow management strategy. Adequately managing cash flow lets you get a significantly better and more accurate read on the financial position of your business.
The most crucial aspect of managing cash flow is constant monitoring. Complete visibility of the money your company is bringing in and how much of that money you have in hand to use is another vital aspect. When you have an accurate idea of your company’s cash flow cycle, you can work to correct any inconsistencies in it.
Following these essential tips can help you manage your company’s cash flow effectively:
1. Cash flow forecasting
The most important thing you can do to notify yourself of problems before they arise is to make regular and accurate cash flow projections. Good forecasting and estimates using a cash flow forecast method, template or tool will help you to make timely decisions.
It also helps if you constantly review and update it and correct any assumptions you made when creating the forecast. Also, stress-testing your projections from time to time is a must.
2. Revenue estimation
The next step is to make an accurate assessment of how your sales will go and how much revenue this will bring in (based on the forecast). Also, it would be best to consider the timelines for getting paid for these sales.
Correct revenue estimation is an important part of your cash flow planning and determines how much you will have to pay for key business outlays.
3. Identification of expenses
Next, identify all your payments and expenses (salaries & wages, rent, investment in new assets, etc.). Also, add interest charges and insurance premiums to your expenses.
You must pay attention to the cash flow projection and look at the line item expenses disproportionate to your sales. You can refer to last year’s bank statements as a checklist while predicting new incomings and outgoings. Continually review your company’s overall cost structure to locate efficiency gaps and implementations that can be modified to increase savings.
4. Financial reporting
Ensuring that your financial statements & reports are up to date is crucial. Otherwise, it won’t be a true reflection of your financial standing. You will also need a reasonably accurate view of your opening and closing financial position.
Further, ensure that you keep an eye on your cash flow statement (inflow/outflow), as this shows your viability in the short term and helps you manage your bills.
5. Leveraging technology
Companies lacking practical liquidity monitoring usually cannot perform accurate cash flow forecasts. Embracing technology can enable decision-makers to manage liquidity in a targeted and simple way.
With the right technology and business strategies, you can worry less about cash flow and dedicate more time to running your business. Moreover, using software to create a budget and preview cash flow projections help to streamline your business processes and increase efficiency.
How does cash flow management impact the future of your business?
Accurate projections of the cash flow will lead your company in the right direction. Since every business has its highs and lows, having a sound knowledge of your estimated revenues and upcoming expenses ensures your business is well-positioned to handle any bump in the road.
Good cash flow management allows businesses to survive storms and build a foundation for long-time success. Most importantly, understanding cash flow techniques allows you to manage cash flow effectively, giving you an edge to stay ahead of the market in future.
To wrap up the best ways to manage cash flow
Managing cash flow is critical to any business. Every business must have a proper cash flow management strategy for long-term financial success. Small and mid-size business owners must take special care in managing cash flow effectively and maintaining an adequate cash stockpile that provides maximum opportunity and flexibility.
Taking advantage of technological advances and AI-enabled solutions, and software applications will certainly provide a business with a much-needed edge.